Banking Expert Peter Mathews on fixing Ireland's Banking Crisis

Consider the Government’s Stated Main Objectives for NAMA:-

1. Cleaning up the Banks’ Balance Sheets so that they can return without distraction and burden to normal business and lending
• Question… what normal business and lending? We’re in recession
• Consider… possible real (but un-stated) reason = slightly “panicky” desire by Banks, who realise very well that they are totally undercapitalised, to get problem loans and all that goes with them off the Banks’ hands at a negotiated lowest possible cost (i.e. NAMA’s highest tolerable purchase price).
2. Obtaining liquidity for the Banks (discounted €51.75bn Bonds for cash) at ECB so that the Banks can then inject more liquidity into the economy – into firms and households by way of loans for capital investment and for working capital purposes. This is highly unlikely to have the stated desired effect, because the Banks will be inclined to use the €51.75bn cash to pay down the huge increase of €46.6bn in Bank Deposits on their Balance Sheets over the last 9-10 months (See Summary Overview Schedule Irish Banks – Key Credit Management Indicators)

Consider some Counter-Indications and Observations as follows:-

• Still a lack of understanding the Fundamental Cause of the Credit Crash and Banks’ busts in Ireland – Abandonment of Fractional Reserve Banking – Make no mistake the Irish Banks are still insolvent and undercapitalised. NAMA doesn’t address this as the single largest weakness and threat to our Banking System




• On Ireland’s Balance Sheet, cleaning up, work-outs and recovering the Bad Loans has to be carried out anyway




• Immediate and Robust re-Capitalisation of Banks at correct Indicative level (not less than €30bn after robust write-downs of not les than €30bn on Bad Loans – see 17th Sep 2009 Excel Spread-sheet Summary Overview of Banks) in addition to proper Re-Habilitated Bank Direction (by new Boards reporting to a State Governance Board) to swiftly prosecute Bad Loans recoveries would promote efficiencies to achieve:-
• Faster rehabilitation of Banks
• Early correction to Property Market Prices and re-activation of property market
• Well based boost to competitive real economy on the back of corrected asset prices and corrected rents etc.
• Resulting Economic traction and competitive re-positioning for overall economy
• With no NAMA no need for new for new Legal Architecture for NAMA entity and operation ….. existing Company Law, Receivership, Examinership and Liquidation Laws already established
• With no NAMA – no Principal / Agency Moral Hazard
• Relatively early (5 years) repayment of State Re-Capitalisation Injections of Equity and Loan Capital by Re-Floats / Sale on Market in 5 years time at 7 times P/E multiple yielding €42bn assuming undemanding Total Bank Sector Profits of €6bn p.a. at year 5.
• Effective New Bank Boards responsible specifically for implementing Bank Policy of prudent Fractional Reserving etc. i.e. controlling Loans/ Deposits Ratios within range 85% – 90%
• Well led Bank Management motivated to earn the Banks’ way back to IPO Re-Floats and Market listings by reference to actual performance on Recoveries of W/D Loans as well as establishing stabilised Banking Profit levels from their traditional lines of normal banking business.
• Rebuilding and restoring Trust and Confidence in Banks as Safe repositories for Savings and Customer Deposits. Banks’ Capital bases are the fundamental support and underpinning of Customer Deposits. The flight of around €31.3bn of Customer Deposits in the last 9 -10 months (see Excel Summary Overview Irish Banks) was evidence of how Confidence in the Banks disappeared when the scale of the Bad Loans could no longer be hidden and it became apparent how severely undercapitalised the Banks were.
• The re-building of Deposits Customers’ Confidence so that Government will get closer to being able to roll back the “blanket” Government guarantee on Customers Deposits.